Easter Bunny
“Easter Bunny”– a cartoon that illustrates how SPACs are having their comeuppance.
A special purpose acquisition company (SPAC) is a “blank check” shell corporation designed to take companies public without going through the traditional initial public offering (IPO) process.
The total number of SPAC IPOs reached record highs in 2021, increasing to 613 from 248 in 2020.
While a case can be made that SPACs offer an alternative (and faster) route to liquidity, the problem is the fee structure, which takes a lot of money off the table by a few key principles.
In addition to typical advisor fees of this type of transaction (which amount to 3-5% of the SPAC transaction), the most egregious is the promote fee that rewards the SPAC manager with 20% of the shares of the target company.
This means ~25% of the SPAC investor’s capital is going toward enriching the SPAC manager, which adds a considerable cost on top of any transaction before an investor in a SPAC can see a return.
Putting an end to this party, the SEC is starting to level the playing field between the IPO and SPAC routes and a large number of SPAC investors are pulling their funds as returns from SPACs that have gone public tumbled 20% in 2022 alone.
